Lessons learned – the Argentine leather industry

Nothing changes as fast as change itself, and since Argentina is no exception to that rule, perhaps it is possible to shed some light on the phenomenal changes that have occurred in the country lately.

This is a country that almost by definition is profoundly cyclical, pendular, politically and economically unstable, and totally unpredictable; however, because of its more than 55 million head of bovine cattle and a sturdy, traditional, professional, export-oriented and well-known tanning industry, it has always been a factor in the global picture of the leather industry.

As a country, one could argue that Argentina has been mismanaged consistently by its governments whether leftist, centre or military for the past 70 years, but never as badly as in the past 12 years under the Kirchner era (four years by Nestor Kirchner and eight by his widow Cristina). The purpose here is not to dwell on political considerations but to show a few statistics to illustrate what this regime – which was finally voted out of government last December – has achieved and the working atmosphere the local industry has had to cope with. These statistics cover the past ten years and are made of official and private entities:

the ten-year compounded inflation rate has been 900%

public employees were increased from 2.2 million to 3.6 million, which is an increase of 64%

in a land of abundant food, the poverty index has risen from 15 to 30%

the fiscal deficit in 2015 was a dramatic 7%

public expenditure (as a percentage of GDP) is at a ten-year average of 36%

the default of its foreign debt entered in 2001 is still pending a solution after 14 years.

Out with the old, in with the new

The new government headed by President Macri, voted in by the skin of his teeth with 51% of the votes, is a centre-right, semi-liberal party with extraordinary professional cabinet members such as any country in the world would wish to have. The problems, however, are immense and the departing Kirchner Government has left the country not only totally bankrupt but full of problems that keep exploding every time the new administration is confronted with national, provincial or municipal financial black holes. Undoubtedly, the working and living atmosphere in Argentina will change dramatically for the better but the depth of the problems will take years to straighten out. However, within the political and economic panorama painted above, the leather industry has seen the following changes.

As to the state of the export tax on bovine wet-salted and wet-blue hides, Argentina has had a fluctuating export tax on these items for the past 40 years.

Cattle population has dropped from 60 million head to 48 million. That is a 20% decrease in ten years. Slaughter has gone from a yearly 16 million head to 11 million, which is approximately a 30% drop. This means five million fewer hides tanned in the country, which has meant the contraction of 30% of the industry with the disappearance of some great tanneries, such as Curtarsa, Cidec, Neira, Becas, Pantin and reconversion to lower production levels in others.

The reconversion to lower levels of production, however, is especially difficult in Argentina due to the exceptionally stringent labour laws that make labour reduction extremely problematic and extraordinarily expensive due to the very high severance payments.

The past is the past

It is at this point that it would be prudent to try to project how the new administration could impact on the leather industry and what the future could hold. In order to analyse this, we have to first understand what is it that happened to the meat industry since, as we all know, leather is an industry based on a by-product of the packers industry.

In modern-day Argentine meat industry history, there is a before and an after of 6 March 2006. On that fateful day, the then President Nestor Kirchner, in a state of fit, because inflation was beginning to get out of hand, decreed a total prohibition of the export of bovine meat (which represented about 25–30% of the total production).

The idea was that, in this manner, the prices of meat for the local population would decrease and the inflation statistics would do likewise. Since then, and until last December, meat exports have been state controlled via the giving out of quotas off and on. The immediate effect of this decree was that cattle breeders slowly but surely disinvested their production, replaced their activity from cattle ranching to agriculture and slowly but surely saw the herds go down from 60 million to the present 48 million head.

The tanners were forced to adapt their tanning capacity by reducing their production accordingly. Incredible as it may sound, Uruguay, less than a tenth of the size of Argentina and with only 12.0 million cattle heads and about 2.2 million kills a year, exports more meat than Argentina.

Back to the future

That was the picture until the end of 2015, when the centre-right party called PRO, presided by Macri won the elections based on a policy of opening up the economy; reducing state controls; lowering subsidies; aligning Argentina once again with its traditional allies in the world such as the EU and the US; and backing up the agriculture, cattle production and the agro-industry that traditionally have always been the backbone of the country’s economy. Undoubtedly, this will bring about increasing the herds and recovering Argentina as a prime producer of meat for export. This will of course take time, investment, perseverance and continuity of the new rules of the game, which have included lower export taxes on all agricultural products. As is well known, the cattle cycle takes three to four years, so a slaughter increase that, to the leather industry will mean more hides, will only be noticeable in two to three years’ time.

An interesting development on this matter is that, in order to accelerate the increase of herds, Argentina has successfully negotiated with its neighbour, Uruguay, for the potential export of important quantities of calves and cows on hoof, which could accelerate the recovery of Argentine herds faster, and have an impact on meat production and the availability of hides.

Cattle population has dropped from 60 million head to 48 million. That is a 20% decrease in ten years.

As to the state of the export tax on bovine wet-salted and wet-blue hides, Argentina has had a fluctuating export tax on these items for the past 40 years. At the moment, the tax is on average about USO 7.40 per wet-salted hide and USO 9.00 for wet-blue, which represents about $0.25/kg for wet-salted hides and $0.20/ft2 on wet-blue. It is difficult to foresee any change to this in the short to medium term. The recently reported reduction in export taxes is a reduction to a flat rate tax that applied to exports of all kinds.

Argentine leather in wet-blue, crust and finished state has been exported during 2015 for a total value of approximately $2.0 billion, of which a fair estimate is that 50% is car and furniture leather, and the rest is for shoes and leather goods. The ten main destinations are Singapore (in transit mainly to China), Thailand, the US, Croatia, Hong Kong, China, Uruguay, Australia, Mexico and Vietnam.

Into the light

Argentina is coming out from perhaps its worst decade for the past 70 years. Its financial, social, political, moral and ethical levels have been weakened by a disastrous regime. It seems amazing that a country that was, 100 years ago, among the ten best countries in the world (measured by its PBI) should have been mismanaged successively by so many governments. However, the country now has had a new opportunity to try to revert the trend, join the western world and regain its prominent position in Latin America. If this happens, the leather industry will participate in this recovery.

For the strong-hearted, strong-willed optimists, perhaps this is a time to consider taking a look around for business opportunities, since there will be a wave of foreign investments coming, now that the 14-year-old defaulted foreign debt is on its way to being finally settled. ?

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